When the Fed Will Cut Interest Rates? Here Are the Latest Predictions
The latest inflation data was a setback for hopes of an interest rate cut at the Federal Reserve’s June meeting.
Analysts at major banks changed their forecasts for the timing of interest rate cuts after the March consumer price index (CPI) report showed inflation accelerated to an annual rate of 3.5%.
The hot CPI reading was driven by cost increases in March for things including car insurance and medical care. Meanwhile, increases in shelter prices accounted for more than 60% of overall annual inflation.
The Fed uses interest rate hikes as a means of slowing the economy to battle inflation, and it is likely to lower rates only when inflation is in check. Previously, many on Wall Street were expecting three quarter-point interest rate cuts in 2024, and that aligned with the most recent projections from Fed officials released on March 20. Now, optimism is waning in terms of how soon Fed will cut interest rates will be cut, as well as how many cuts there will be this year.
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View RatesInterest rates have far-reaching effects on the economy. Americans are still dealing with some of the highest loan rates in years. According to the National Association of Realtors, mortgage rates will likely rise above 7% following this inflation data update. (There have also been positive aspects of this current rate environment, like better returns on certificates of deposit.)
Before rates can be cut, Fed officials are waiting for evidence that inflation is closer to the 2% target level. The main question right now is how long it will take for them to get there.
This week, economists at companies including Goldman Sachs, UBS and Bank of America revised their predictions after the CPI print: They no longer expect three rate cuts in 2024 and say the first cut likely won’t come until at least July.
Will the Federal Reserve cut rates in June?
A June rate cut looks much less likely than it did a few days ago. However, the Fed could still decide to go forward with a rate cut in June if officials feel that interest rates are too restrictive. Any data showing that inflation is slowing down or that the labor market is cooling would help the argument for a June rate cut.
“We believe 3 interest rate cuts are plausible for 2024. Market pricing is beginning to reflect risks of even 2 cuts this year, but right now 3 is our base case,” Gargi Chaudhuri, head of BlackRock's iShares investment strategy in the America, said in a Wednesday note. However, she adds that it’s looking more likely that these forecasted cuts will start sometime after June.
Analysts still expecting cuts later in the year
The new market expectation is for there to be two rate cuts in 2024, with the first one happening by September, according to the CME FedWatch tool.
Rohan Reddy, director of research at Global X, a thematic ETF firm, says the latest CPI data reignited concerns about inflation, likely pushing back the timeline for cuts.
"This is now the third straight month that CPI has beat expectations, so this will give the Fed additional reason to delay rate cuts further," Reddy says.
Economists at Bank of America, who updated their forecast Thursday to only call for one rate this year (in December), said the inflation data will make Fed officials worried about the risks of cutting too soon.
"We think the Fed will have difficulty reaching a consensus to cut rates in June. It was a close call to begin with, with the committee roughly 50/50 between expecting three or more cuts this year versus fewer than three at the time of the March meeting. Hence, we take a June rate cut off the table," analysts said in a note. "We think this rationale also rules out cuts that start in July or September. We just don't see enough progress on inflation and its components by then."
Goldman Sachs is forecasting two rate cuts in 2024 starting in July, while UBS expects the same number but starting in September.
Is another interest rate hike possible?
In recent weeks, most of the discussion around the Fed has been about when it will cut rates. But the latest inflation reading was a reminder that cuts aren't guaranteed this year, and it's always possible that there could be another rate hike if economic conditions change.
"With unemployment strong and commodity prices heating up, the Fed’s next move could very well be a rate hike to tame prices and keep inflation under control," Skyler Weinand, chief investment officer at Regan Capital, said in a note.
Joe Davis, chief global economist at Vanguard, echoed the concern that there's too much focus on cutting. "I have been confused as why the rush to cut," he said in a note. "There are still embers of inflation here and there in the economy."
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